Home » Money

Big is bad: Exide learns hard way

Friday, 17 January 2014 - 9:20am IST | Place: Kolkata | Agency: DNA
Capacity expansion in anticipation of demand surge turns into disadvantage.

Being big isn’t good always, especially where overheads start eating into profitability. In fact optimisation of capacity utilisation is key to success.

This is turning true for market leader, Exide Industries, which is struggling with falling profitability and revenue while its nearest rival, Amara Raja, though smaller competitor, continues to thrive with better margins and growing sales.

Exide, in an admission to analysts, said expanding capacity in anticipation of a surge in demand for automobile has turned into a major disadvantage.

Idle capacity has now led to comparatively higher overheads, hence higher costs for every battery produced and so less ability to cut prices.

“Due to shrinking market, capacity utilisation in April-December period was very low, 71% in automobiles, 76% in motorcycles and 63% in industrial. I consider this is our biggest problem today as lower capacity utilization pushes up cost of production. Whereas if you look at our nearest competitor they are operating at 100% capacity utilisation as their capacity expansion hasn’t come in. This is their biggest advantage as this has helped them to keep their prices low. They still sell at 10-14% lower prices than us yet they are making good margin,” Exide’s managing director, P K Katakay told analysts.

Exide has suffered a sharp 25% drop in its bottom line at Rs 77.52 crore and 10% drop in sales to Rs 1,301 crore for the third quarter ending December while Amara Raja, which is yet to come out with its earnings for the third quarter, had a handsome 23% growth in profits to Rs 95 crore with 12% growth in sales at Rs 807 crore in the previous quarter.

As for Exide, capacity utilisation is not optimal and would work to its advantage only when the market for automobiles turns around, Katakay indicated.

But before that happens, Exide wouldn’t be resorting to price cuts just to take on Amara Raja, he said.

“We didn’t cut prices due to competition. We are not going to fight over price.”

Exide had raised prices, first by 5% in April-May, and then again by 7% in September-October when rupee touched Rs 68 to a dollar and premium on lead was high. But subsequently it had cut prices when rupee went back to Rs 62.

Katakay didn’t elaborate on the extent of price cut but said all of hikes effected during the year hasn’t been taken back.

“It’s not that prices were cut across segments. There was some rationalisation including some hikes in some segments.”

Dominant presence in other sectors like industrial batteries as well as those used in projects where it has above 80% market share is also acting against Exide.

The market has been shrinking, Katakay said, creating excess capacities and consequently higher costs.

“With slow industrial growth, traction batteries used in fork-lift cranes are not being replaced,” he said.

The inverter battery segment, where it has 80% market share contributing 25% of revenues, is another sore point.

“There has been a significant de-growth and we have lost a top line of about Rs 445 crore or 6,00,000 units of inverter batteries this year compared with previous year,” he said.

Improvement in thermal power generation coupled with lower demand of power from industries leading to comfortable supplies to domestic power consumers have significantly hampered demand.


Jump to comments

RELATED

Around the web